Schapiro: Robo-trading eyed in 'flash crash'

By Aaron Smith, CNNMoney.com staff writerMay 20, 2010: 11:55 AM ET

NEW YORK (CNNMoney.com) -- Mary Schapiro, chairwoman of the Securities and Exchange Commission, told a Senate panel on Thursday that out-of-control computerized trading could be responsible for the historic market plunge on May 6.

Schapiro told panelists that the 1,000-point stock plunge was "possibly exacerbated by the withdrawal of liquidity by electronic market makers and the use of market orders, including automated stop-loss market orders."

She emphasized that one of the most important factors in controlling rapid market plunges is to "get that human factor back into" the markets "when the technology has run amok."

Gary Gensler, chairman of the U.S. Commodities Futures Trading Commission, agreed that "we need to examine whether further protections are needed in these fast-paced computer-driven markets."

He added, "We can't stop technology, but I think we need to update our [regulations] to stay abreast of this."

This blame-the-machines analysis inspired Sen. Charles Schumer, D-N.Y., to compare the market plunge to Stanley Kubrick's "2001: A Space Odyssey," a science fiction film "when the machines took over."

But Schapiro avoided making any definitive statements as to what caused the plunge. She said her agency is sifting through 17 million trades from May 6 to determine exactly what led to the extreme volatility.

Schapiro said the "voluminous trading records" under examination include 17 million trades that occurred between 2 p.m. and 3 p.m. on May 6, when the market experienced its biggest intraday point dropin Dow Jones history.

Schapiro's testimony comes just two days after the SEC proposed new rules that would pause trading in certain stocks that experience extreme swings.

Under the rules proposed on Tuesday, trading in an individual stock would pause across all U.S. stock markets for a five-minute period in the event that the stock experiences a 10% change in price over the preceding five minutes.

But Schapiro also suggested that additional measures - including "a process that is more transparent" - might be needed to prevent a similar collapse.

Schapiro acknowledged a "possible linkage" between the May 6 volatility and E-mini S&P 500 futures, as some theorized after the plunge. But she dismissed rumors that a fat-fingered trader of E-minis was to blame.

"We have no evidence that these factors were caused by fat finger errors, computer errors or act of [cyber]terrorism," she said.

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